From Retirement Now Newsletter March 25th 2021

Tax Efficiency in Retirement

A good article at the Journal of Financial Planning recently compared different strategies to help reduce taxes on IRA accounts in retirement when withdrawing funds to supplement Social Security.

The study ran different scenarios comparing the Conventional Wisdom (draw from non-IRAs first, then IRA’s, then lastly Roths) against some other strategies.

Using some of the other strategies, real improvements were made throughout the retirement period. Even extending a portfolio an additional 3 years due to paying less in taxes. Over time it resulted in around $90k in tax savings, which in the first study (Case A) was the equivalent of about 11% of the portfolio’s starting value ($800k).

Not too shabby.

Which of course if you are planning your retirement can be a big deal. Because another way of saying this study showed a 3-year extension of a portfolio, would be to say that maybe you can hit your retirement savings goal a little earlier than expected by applying the tax savings concepts in the article.

And one of the biggest concerns I have heard from pre-retirees is knowing when they have hit that savings numbers where they have enough accumulated to retire. And then on top of that, what are some actions that can be taken throughout retirement to help that portfolio last as long as possible, while simultaneously supporting withdrawals that cover living expenses.

Here’s my takeaway on this study:

It helps us to derive the impact that saving money on taxes can potentially have throughout retirement. In this study, some strategies allowed the portfolio to last over 3 years longer, and with annual portfolio withdrawals of roughly $30k per year to support spending, that’s over $90k in savings attributable to smart tax planning. The first scenario assumed a starting account size of $800k, thus a $90k savings over time equals roughly 11% of the portfolio’s starting value.

This tax planning concept is the big benefit studies like this bring to the table to help retirees not run out of money. However, this study (and those like it) are not intended for individual advice. Too many variables are assumed (rates of return, future inflation, future marginal tax rates!, future spending needs of the retiree).

The benefit is in the concept. And applying that concept on a step-by-step basis each year could potentially have very big benefits to retirees.

In real life no one knows what tax rates will do going forward. We can only infer and reason through it.

For example, government spending is high, federal tax revenues are far lower than federal spending creating a deficit that seems to get bigger every year, this deficit causes the debt to go up every year, Congress doesn’t appear to have any desire to cut back on spending, therefore… which way does it seem tax rates will go?

Another benefit?

It reminds us of the different taxes that could impact a retiree. It’s not just income tax. There’s an additional premium for Medicare Part B and D if you exceed certain thresholds. There are thresholds that cause Social Security to be taxed, and having income inside those thresholds can create high effective marginal tax rates (the “tax torpedo”). There is net investment income if you exceed certain thresholds.

There are things that could trigger these additional taxes accidentally if not done carefully. For example, doing too much of a Roth conversion could cause certain income thresholds to be breached that have more than just a higher marginal tax rate impact on a retirees take-home check.


Studies like this are important. Especially in light of large federal deficits, lower tax revenues caused by Covid last year, and increasing federal debt. Taxes could possibly be one of the biggest expenses retirees face, especially if they don’t take actions today to help minimize them. 


Chris Hammond

P.S. We specialize in helping retirees (and those retiring in the next 5-10 years) determine how much they need to save, how to not run out of money, and help them lower their taxes throughout their retirement years.
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